UK Economic Growth Forecast Raised to 1.3% by Bank of America

Stronger Q2 Results Prompt Upgraded Outlook, but Risks Still Linger

Growth Outlook Upgraded – But Caution Remains

Bank of America Securities has revised its UK economic growth forecast for 2025, nudging it up from 1.2% to 1.3%. The adjustment follows stronger-than-expected second-quarter performance, largely driven by government expenditure and a temporary build-up in inventories.

Despite this modest upgrade, the investment bank was clear in its message: underlying growth remains “fragile”, and economic momentum is still constrained by structural headwinds such as rising tariffs, tax burdens, and subdued private sector demand.

“We slightly raise growth this year to reflect stronger outturns, but highlight that underlying growth is weak amid tariffs and taxes,” said the brokerage in its recent note.

Weak Consumer and Business Demand Still a Drag

While headline growth was supported by the public sector, private domestic demand—encompassing both consumer spending and business investment—fell sharply. This indicates that the broader economy remains vulnerable despite temporary boosts.

• Consumer spending: remains weak amid cost-of-living pressures.
• Business investment: continues to decline due to uncertainty.
• Exports: have taken a hit, particularly to the United States, where goods exports have fallen 27% in value due to new tariffs.

Inflation Set to Persist Beyond 2025

Inflationary pressures are expected to remain elevated over the coming years. Bank of America now forecasts consumer prices will rise by:

• 3.4% in 2025 (up from 3.2%)
• 2.4% in 2026
• With a return to the Bank of England’s 2% target not expected until 2027

The upward revision in inflation forecasts is attributed to recent data surprises, higher oil prices, and an expected 2% increase in the Ofgem energy price cap this October.

Interest Rate Cuts Still Expected – But Timing Uncertain

Bank of America maintains its forecast for two interest rate cuts from the Bank of England, likely in:

• November 2025
• February 2026

These would bring the base rate down to 3.5%. However, the bank warns that persistent inflation could delay this schedule.

“Timing of future cuts is becoming more uncertain due to the BoE’s concerns about inflation persistence.”

Budget and Fiscal Policy Could Become a Growth Risk

Looking ahead to the Autumn Budget on 26 November, the bank estimates a potential £20–£30 billion reduction in fiscal headroom. This could force the government into implementing tax hikes—an unpopular move during a general election lead-up, but one that may be necessary.

Any such fiscal tightening would likely act as a drag on growth in late 2025 and into 2026.

Conclusion: Short-Term Relief, Long-Term Uncertainty

While the slight upgrade to the UK’s 2025 growth forecast may bring cautious optimism, the path ahead remains riddled with challenges. Persistent inflation, reduced consumer demand, and fragile private investment are ongoing concerns.

Investors and policymakers alike should keep a close eye on:

• Monetary policy timing
• The upcoming Autumn Budget
• External trade dynamics

Although the economy appears to have dodged a sharper slowdown for now, Bank of America’s report signals that the UK is far from out of the woods.

Sources: (Investing.com, Reuters.com)